Full Employment Without Inflation : Manifesto for a Governed Economy

The public appearance of the ideas developed in this book dates back a decade, to a seminar on price controls that I gave to the Economics Department at Warwick University in the spring term of 1973. My original interest in controls as a permanent anti-inflation policy probably stemmed from aremark made in 1971 or 1972 by Professor John Williams, of the University of Otago in Dunedin, New Zealand. Williams conjectured that markets adjust to long-term changes in supply and demand more by shifts in output than by changes in relative prices. This could imply that a permanent price controls policy, which would have to match any trends in relative prices, might not be as difficult to operate as was (and is) commonly supposed. Whatever the empirical validity of Williams's conjecture (and neither my own nor others' research has yet established this), it inspired me to look more closely at the possibility of a direct anti-inflation policy. I found that such had been employed with great success in many economies as recently as the Second World War, but with little subsequent attempt to look openmindedly at their possible peacetime application. For ideological as weH as inteHectual reasons most weH-trained economists are uncomfortable with the very idea of 'controls', and though with no great expertise in the area tend automatically to invoke insuperable 'administrative difficulties' against them when other arguments fail. My investigations lead me to believe that a successful direct anti-inflation policy is indeed administratively and economically feasible, and is thus highly desirable, given the benefits of a stable price level, and the even larger benefits from areturn to fuH employment which would become possible if the inflation threat were dealt with directly. But developing the logic of the policy has taken me far from the form of either the wartime system, or the various 'incomes policies' that have been tried since. It has led, too, to the recognition of certain principles of policy-making which I suggest can be applied, under the rubric of 'the govemed economy', to achieving important goals in addition to stable prices -a satisfactory trade balance, sensible use of energy, and very low unemployment rates. ix x Foreword And, perhaps equally important, the governed economy approach leads to a list of things that government should not be doing -in dust rial policy and trying to eradicate poverty, for example. All this may seem rather radical. But I try to stress in the book that my proposals are fundamentally consistent with the basic commitment to efficiency and equity that is shared by most economists, and with the respect for decentralised competitive markets to which their commitment leads them. The problem is that competitive markets do not spring up spontaneously, as orthodox economics assumes. Market fore es must be stimulated and protected. In many situations ideal markets areimpracticable, and then the challenge is to somehow simulate their beneficial effects on economic behaviour. All this mandates a role for government. But the policies of the governed economy look rather different from our present assortment of attempts to 'manage' the economy. And assessing my proposals requires a firm commitment to openmindedness on the part of the reader, perhaps especially the reader with some formal training in economics. Of course, openmindedness doesn't necessarily lead to agreement. Nor should it. It is most unlikely that everything in this book is correct, but I do not know which bits are wrong. I am fairly sure, though, that the extent of error has been significantly limited by the comments and suggestions received at seminars given at various institutions around the world. Front Matter....Pages i-x Introduction and Summary....Pages 1-10 Front Matter....Pages 11-11 Charting Economic Decline....Pages 13-21 Keynesianism: The Incomplete Revolution....Pages 22-30 The Wacky World of Mark II Monetarism....Pages 31-37 The Importance of Being Elastic....Pages 38-43 An Elasticity Crisis in the Lumpy Economy....Pages 44-54 Front Matter....Pages 55-55 The Possibility of Full Employment....Pages 57-61 Inflation and the Curve....Pages 62-68 In Search of Band-X....Pages 69-76 The Principles of Appropriate Policy-making....Pages 77-84 Specifying Policy Instruments....Pages 85-92 Proposal for a Governed Economy....Pages 93-101 Front Matter....Pages 103-103 Price Controls and Inflation....Pages 105-114 Eleven Fallacies about Controls....Pages 115-124 Incomes Policies: How to Not Control Inflation and Get Everyone Mad....Pages 125-134 Achieving Full Employment: The Case of the Faint-hearted Entrepreneurs....Pages 135-142 Trade and Exchange Rates....Pages 143-151 Government: the Deficit and What to Do About It....Pages 152-158 Front Matter....Pages 159-159 Against Monopoly....Pages 161-168 Regulation....Pages 169-175 Front Matter....Pages 159-159 Labour, Work, and Women....Pages 176-183 Hierarchy: How the Middle Class Does It....Pages 184-190 Flattening the Hierarchies....Pages 191-198 Front Matter....Pages 199-199 Productivity and Industrial Policy....Pages 201-210 Being Sensible about Energy and the Environment....Pages 211-218 Poverty: A Modest Proposal....Pages 219-227 Front Matter....Pages 229-229 The Role of Economists....Pages 231-235 Back Matter....Pages 236-264 Plea for increased state intervention in the economic system to achieve full employment without inflation in developed countries - examines partial failure of Keynesian approach and the "laissez faire" economic theory of capitalism; suggests new incomes policy, price stabilization, satisfactory balance of trade, low unemployment rates, system of retail-level commodity price controls, consumer price index, etc. References